by Zack Bombatch, Staff Writer
In October 2012, the Pennsylvania Supreme Court heard oral
arguments for Butler v. Powers Estate,
a case that may impact mineral rights in Pennsylvania and has the potential to
create a significant disturbance in the already chaotic energy industry.
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In an 1881
deed, Charles Powers transferred a 244-acre farm in Susquehanna County to
Patrick Fitzmartin. The deed contained a
reservation for half of the property’s “minerals” and “petroleum oils” which
Mr. Powers assigned to his heirs. In
2009, the Butlers (heirs to Fitzmartin) brought an action against the Powers
(heirs to Charles Powers) to quiet title to the natural gas within Marcellus
shale underneath the farm. The Powers
conversely sought declaratory judgment stating that they owned the natural gas
because of the reservation of “minerals” in the 1881 deed. The issue before the Court is whether the
deed reserved rights to the natural gas from the Marcellus shale through the
reservation of “minerals.”
Traditionally,
Pennsylvania courts interpret deeds and any reservations by examining the
parties’ intent. This interpretation has
been guided by an 1882 case where the Pennsylvania Supreme Court established
the Dunham Rule. The rule prohibits the inclusion of natural
gas in mineral rights, and it requires that a separate conveyance or
reservation be made for natural gas and oil.
The rule has been applied to natural gas trapped within coal seams, even
when the gas’ existence is unbeknownst to landowners or grantees. However, the
presumption of the Dunham Rule may be
overcome if a party may demonstrate “clear and convincing evidence” that the
oil and natural gas in question was intended to be included within a “mineral”
reservation.
The Butlers
argue that the reservation of “minerals” and “petroleum oils,” under the Dunham Rule, does not include natural
gas trapped within Marcellus shale. However,
the Powers argue that the Dunham Rule
applies only to “wild gas” and that gas trapped in very small quantities
throughout the Marcellus shale is “unconventional gas.” The Powers attempt to analogize
“unconventional gas” to coalbed methane.
Occasionally, thin pools of methane are trapped within a seams of
coal. The traditional rule for coalbed
methane grants ownership of the methane to whoever owns the coalbed.
Until
contemporary times, Marcellus shale was considered a useless geological
formation. It seems unlikely that the
parties in 1881 could have determined a need for the reservation of a seemingly
useless material.
Further,
mineral rights generally concern geological formations that may be mined and
sold, such as gold or coal. Marcellus shale
is a solid rock with little to no value beyond the natural gas trapped within
it. Moreover, it is difficult to make a
determination of “wild gas” versus “unconventional gas” because both forms of
gas are trapped beneath the surface of the Earth by some sort of solid
geological formation. An application of
the Dunham Rule over two purported
types of gases may lead to difficulties in determining if gas is
“unconventional” enough to escape the Dunham
presumption.
The energy
industry and associated law firms are paying close attention to the Court’s
ruling because the decision could impact thousands of deeds and leases that
permit natural gas production operations.
The case
presents significant practical concerns that will impact the effectiveness of
leases signed within the previous decades and current natural gas drilling
operations.
If the
Court chooses to strictly apply the Dunham
Rule, the energy industry and attorneys involved in property law will be
negatively impacted because of the uncertainty such a holding would create. A
strict application of the Rule would send attorneys and landowners scrambling
to review the specificity of deeds, reservations, and leases from previous
decades.
This
uncertainty will no doubt lead to economic disruption and decline. This economic decline would certainly impact
the energy industry in the short-term, but may also affect the longevity of
energy companies and lease brokers if they are forced to re-enter and redesign
leases with landowners where they have current or eminent drilling
operations.
It is hoped
that the looming decision of the Court is released soon, and its release is
definitely worth watching.
